PSI Ohio Insurance Practice Exam

Current assumption whole life policies are most sensitive to which of the following factors?

1. Mortality rates

2. Administrative costs

3. Interest rates

4. Underwriting standards

The correct answer is: Interest rates

Current assumption whole life policies are most sensitive to interest rates due to their structure and design. These policies allow for the adjustment of premiums and benefits based on the prevailing interest rates, which affect the policy's cash value accumulation and overall performance. A key feature of current assumption life insurance is that it reflects current economic conditions, including interest rates. When interest rates rise, the policy’s cash value can increase more rapidly, and it may lead to a greater potential for policy dividends. Conversely, if interest rates fall, the growth of the cash value may slow down, impacting the policyholder's financial expectations and the company's profitability. While mortality rates, administrative costs, and underwriting standards do play significant roles in the overall operation of life insurance products, they do not have the same direct and sensitive relationship with current assumption whole life policies as interest rates do. For example, although mortality rates impact the overall risk and pricing of the policies, the adjustments in cash value are primarily influenced by the interest environment. Hence, the impact of fluctuating interest rates is crucial for understanding the performance of these insurance products.